Reference no: EM132639337

a) Consider Andrew's and Brian's taste for milk and cereal. Andrew likes both milk and cereal and he is the type of person who prefers balanced bundles to extreme bundles. Brian also likes milk and cereal. However, Brian is the type of person who has a constant rate at which he would be willing to trade cereal and milk in his morning bowl, and thus would be indifferent between having his morning bowl with only cereal or only milk.

a.1) In two separate graphs, measuring milk along the horizontal axis and cereal along the vertical axis draw three indifference curves consistent with the description of Andrew's and Brian's tastes.

a.2) Suggest a utility function that is consistent with Andrew's tastes as described above and a utility function that is consistent with Brian's tastes as described above.

b) This exercise is adapted from an application in Thomas Nechyba's textbook Microeconomics (South-Western). Suppose an average traveler's tastes can be described by the utility function U(x,y,z) = x(y + z) where x is miles traveled by air, y is "other consumption", and z is an index of air safety that ranges from 0 to 100.

b.1) Calculate the MRS of other goods for airline travel (MRSY,X).

b.2) What happens to the MRS when air safety (z) falls from 100 to 80?

b.3) Is this consistent with the observation that after the tragic events of September 11, 2001 fewer people felt like traveling by air? In the context of this model, have tastes changed?

b.4) Suppose that u(x,y,z) = xyz instead. Does the MRS of other consumption for air miles travelled still change as air safety changes? Is this likely to be a good model of tastes for analyzing what happens to consumers after news of airborne disasters?